Indian taxes are not so much administered by laws as by the rules these officers take it upon themselves to write when the political masters have completed drafting the broad strokes.

Prime Minister Narendra Modi delivering a speech during his US visit.

Just hours before Prime Minister Narendra Modi sat down to a dinner with a group of CEOs in New York, back home the finance ministry issued a release clarifying that a zero tax regime will continue for foreign companies that do business with India but have not set up base on its shores.

The timing was obviously not coincidental. However, the contents of the release had a lot to do with those CEOs’ concerns about India, more specifically about the bureaucracy and even more particularly, the tax officers.
Indian taxes are not so much administered by laws as by the rules these officers take it upon themselves to write when the political masters have completed drafting the broad strokes.
In 2006, the Indian Parliament wrote an act to promote special economic zones. That act is still on the books but investments in the zones have dried up. That’s because, over the years, the revenue department has written in clauses often as rules in other acts that defeat most of the benefits to investors promised in the SEZ act.
In contrast, there’s the Benami Transactions (prohibition) bill that has been introduced in the Lok Sabha in May this year. The bill had to be brought in primarily because since 1988 the older act sat like a dummy without the rules being framed. Unless prodded vigorously this act too could go the way of the former. So while the SEZ act that promised investment sops galore turned sterile by rules, the act to extend the Executive’s powers to curb black money became a dead letter through the same means. This is what concerns the CEOs. The commitment made by the political executive in India is often nullified by the rule-making powers of the bureaucracy. While these rules are supposed to operate only under the umbrella of the act, they have often gone beyond, thwarting the very causes espoused by the economic legislation. For instance Thursday’s release was undoing a plan to levy minimum alternate tax (MAT) on all companies that did business in India irrespective of their country of origin. Those plans had killed promises made by a succession of finance ministers of a predictable and a reasonably low tax rate regime. As the Partha Shome Committee has pointed out, it should be made mandatory from now on for the tax department to spell out through press releases the reasons why they have made changes in rules when they make them. That will go a long way towards checking the capriciousness of the bureaucracy and to make international investors commit funds to India. It is an announcement that will help the Prime Minister in his meetings abroad.